Parallel monetary systems?

One of my close research col­leagues Trond Andresen has writ­ten the fol­low­ing sys­tems engi­neer­ing analy­sis of how a par­al­lel non-debt-based mon­e­tary sys­tem might func­tion in an econ­o­my suf­fer­ing a debt-induced cri­sis in its main mon­e­tary sys­tems. I thought his analy­sis could be of inter­est to read­ers of this blog.

(This is a revised and expand­ed ver­sion of a paper pre­sent­ed and in the pro­ceed­ings of the 9th Soci­ety of Het­ero­dox Econ­o­mists Con­fer­ence, Decem­ber 6 and 7 2010, UNSW, Syd­ney.

An ear­li­er and short­er ver­sion appeared in Coun­ter­punch June 25 ? 27, 2010.)

What if the Greeks, Irish, Baltics, Spaniards, Ital­ians did this:
high-tech par­al­lel mon­e­tary sys­tems for the under­dogs?

Advances in infor­ma­tion tech­nol­o­gy now make it pos­si­ble for non-gov­ern­ment enti­ties, or gov­ern­ments them­selves, to estab­lish and run a nation­al par­al­lel paper­less mon­e­tary sys­tem at very low cost and launch it on very short notice. The work­ings of such a sys­tem is described and dis­cussed. Such sys­tems may ame­lio­rate the dire state of affairs in the hard­est hit euro­zone coun­tries, and increase the polit­i­cal pres­sure on EU and nation­al elites for debt for­give­ness, full employ­ment and reduc­tion of cut­backs. It may also be applied in near-bank­rupt U.S. States.

“World­ly wis­dom teach­es that it is bet­ter for the rep­u­ta­tion to fail con­ven­tion­al­ly than to suc­ceed uncon­ven­tion­al­ly”- John May­nard Keynes

1. Intro­duc­tion

This is an attempt to think out­side the box, because any sorts of think­ing inside the box on Greece, Ire­land and oth­er coun­tries in sim­i­lar sit­u­a­tions has not led to any­thing and will not either. (But if the read­er knows about some uncon­ven­tion­al pro­pos­al that I may have over­looked, please point me to it!)

At the time of revi­sion of this paper, 3 Octo­ber 2011, the sit­u­a­tion espe­cial­ly for Greece is even graver than when the two ear­li­er ver­sions were writ­ten in 2010. The main changes from ear­li­er ver­sions is that I have added two fig­ures, and I expand on the need and pos­si­bil­i­ty for gov­ern­ments to use this option, not only pop­u­lar organ­i­sa­tions or mobile phone com­pa­nies.

Fig­ure 1

Fig­ure 1 above shows the dire state of a coun­try that has exces­sive euro debt. The thick arrows are flows of goods and ser­vices, while the thin arrows are mon­ey (euro) flows (a time unit is indi­cat­ed as w = week, but this choice does not have any impor­tance for this paper). The gov­ern­ment has to extract euros out of the non-gov­ern­ment econ­o­my to ser­vice its debt, by tax­ing more than it spends. The pri­vate sec­tor does the same, send­ing euros to for­eign debtors. The only way to counter these two “blood­let­ting” flows from the domes­tic econ­o­my is to increase exports to a lev­el that sur­pass­es the sum of the two out­go­ing flows. This is not pos­si­ble, espe­cial­ly after debt bur­dens have increased steeply due to risk-caused increas­es in inter­est lev­els on gov­ern­ment bonds. So debt has to be part­ly writ­ten off, but since the cred­i­tors refuse this, the domes­tic econ­o­my will be increas­ing­ly starved for mon­ey. It is there­fore in need of a par­al­lel medi­um of exchange. This will reduce unem­ploy­ment and enable peo­ple and firms to exchange goods and ser­vices. It will also enhance the coun­try’s bar­gain­ing posi­tion towards the cred­i­tors.

2. A non-gov­ern­ment mon­e­tary sys­tem

The pro­pos­al

An alliance of large grass roots organ­i­sa­tion (typ­i­cal­ly: unions) sets up a coop­er­a­tive bank-like oper­a­tion (“BLO”). Prob­a­bly it should for­mal­ly be an asso­ci­a­tion requir­ing mem­ber­ship to par­tic­i­pate (more on this below). This BLO issues “val­ue points” (an arbi­trar­i­ly cho­sen term, from now on abbre­vi­at­ed “VP’s” ? it could be called “units”, “work units”, “cred­its”, “coupons”, what­ev­er ? but should for legal rea­sons not be called “mon­ey”). Tech­ni­cal­ly, the BLO is just a nation­al office with com­put­er capac­i­ty and a few employ­ees. There are no branch­es. A mem­ber gets a VP “account” with the BLO. To use the account the mem­ber needs a mobile phone sub­scrip­tion. When open­ing an account, (s)he is auto­mat­i­cal­ly offered cred­it up to a stan­dard amount of VP’s from the BLO. Such a “start loan” has the pur­pose of enabling the per­son to start trans­act­ing with oth­ers. It is pri­mar­i­ly meant as a medi­um of exchange, and not as a store of val­ue. It is inter­est-free, but there is a very small mem­ber­ship fee per account, which is only to cov­er the expens­es of the BLO office and computer/network costs. This fee must be paid in euros/regular mon­ey. The VP loan has lim­it­ed dura­tion, a few months. When the loan expires, the bor­row­er has the right to an auto­mat­i­cal­ly renewed loan, but the max­i­mum amount allowed may have been adjust­ed some­what up or down in rela­tion to the last loan received. More on this below.

Tech­no­log­i­cal progress makes this pos­si­ble

What is to be pro­posed here is a nation­al and extreme­ly effi­cient ver­sion of a Local Exchange Trad­ing Sys­tem (LETS) or a local cur­ren­cy sys­tem. These are basi­cal­ly barter schemes but strong­ly improved by using a local medi­um of exchange. Mem­bers gain points by sup­ply­ing goods or ser­vices to oth­er mem­bers. Such points gained are in the next round used to buy goods or ser­vices from oth­er par­tic­i­pants. The big advan­tage is that this enables eco­nom­ic activ­i­ties local­ly which would else not have tak­en place due to lack of a reg­u­lar medi­um of exchange (i.e. mon­ey). A LETS sys­tem has tra­di­tion­al­ly been man­aged by some trust­ed person(s) keep­ing tal­ly of every­ones’ points account, in mod­ern times on a com­put­er. This is done when reports of exchanges are received. Such a sys­tem is only man­age­able when it is con­fined to some local com­mu­ni­ty. Anoth­er fac­tor lim­it­ing the geo­graph­i­cal and pop­u­la­tion scope of such schemes is that par­tic­i­pants need to know which oth­er agents (per­sons, firms) are also in the scheme, and what sort of ser­vices or goods they offer.

A local cur­ren­cy sys­tem does a sim­i­lar job as a LETS scheme. In that case one has cir­cu­lat­ing paper cur­ren­cy resem­bling reg­u­lar mon­ey, some­thing that elim­i­nates the need for account updates with each trans­ac­tion, but which may be legal­ly dif­fi­cult to uphold due to the state’s monop­oly on mon­ey issuance.

A LETS-like scheme must do the fol­low­ing:

account for trans­ac­tions (or run a local mon­e­tary sys­tem)

give par­tic­i­pants an easy and fast way to find oth­er par­tic­i­pants in the sys­tem and what they offer (or demand).

Today, with most peo­ple hav­ing mobile phones, and also access to the Inter­net (whether at home, work or else­where), both chal­lenges may be ele­gant­ly and cheap­ly met, and “the local com­mu­ni­ty” may be expand­ed to encom­pass a coun­try (or state, like in the U.S.). Report­ing of trans­ac­tions is done via mobile phone/SMS and auto­mat­i­cal­ly received and account­ed for on a serv­er. And a web site data base (pos­si­bly on the same serv­er), updat­ed by par­tic­i­pants and hav­ing a Google-like search sys­tem, will enable par­tic­i­pants to adver­tise them­selves or to eas­i­ly find sell­ers and and buy­ers any­where of the rel­e­vant goods or ser­vices.

Grad­ual increase in trans­ac­tions

Mobile phone trans­ac­tions with oth­er BLO mem­bers may be imple­ment­ed through one of the tech­ni­cal­ly proven schemes already in oper­a­tion in some devel­op­ing coun­tries. There are no physical/paper VP’s in cir­cu­la­tion. Peo­ple and firms offer­ing goods and ser­vices will grad­u­al­ly ? as the scheme gets more pop­u­lar decide to accept a cer­tain share of VP’s as pay­ment, while the rest must still be in euros. Such a share is decid­ed freely and indi­vid­u­al­ly by the sell­er, and may also be adjust­ed at any time with cir­cum­stances. The same holds for wages: employ­ers and employ­ees may as the scheme gets wide­ly accept­ed, agree on a cer­tain share of wages being paid in VP’s, a share that may be re-nego­ti­at­ed as things devel­op.

Pure fiat mon­ey

The VP’s are pure fiat mon­ey. They do not have any prop­er­ty giv­ing it an intrin­sic val­ue like mon­ey issued by a cen­tral bank, which has indis­putable val­ue by being the sole cur­ren­cy that may be used to pay tax­es (as per the “MMT = mod­ern mon­ey the­o­ry ” or “Char­tal­ist” view). Peo­ple or firms will there­fore accept VP’s in pay­ment only if they believe that a suf­fi­cient amount of oth­er people/firms will accept them. This out­come is prob­a­ble how­ev­er, since today’s only alter­na­tive for the Greeks (and oth­er nations in a sim­i­lar sit­u­a­tion) of increas­ing hard­ship, unem­ploy­ment and too low and fur­ther shrink­ing income in euros over many years, is much worse.

Fig­ure 2

Fig­ure 2 shows the sys­tem with exchanges in VP’s in par­al­lel with euros. The addi­tion­al cir­cu­la­to­ry sys­tem is indi­cat­ed at the bot­tom. The pub­lic holds stocks of both VP’s and euros using these for exchanges, and out­put YDcon­sists of two com­po­nents, medi­at­ed in euros and VP’s respec­tive­ly. The thick arrows indi­cate goods and ser­vices being trans­act­ed.

Build­ing con­fi­dence

The VP scheme has dynam­ics which may be unsta­ble both ways: con­fi­dence build­ing more con­fi­dence, or decreas­ing con­fi­dence lead­ing to steep infla­tion and col­lapse. One should ensure a basic and ini­tial lev­el of con­fi­dence by the BLO being launched and run by (a) large, nation­al and well estab­lished organisation(s). Sec­ond, and most impor­tant, by con­trol­ling the amount of VP’s in cir­cu­la­tion, based on observ­ing the aver­age accep­tance of VP’s as a share of pay­ment togeth­er with euros, it should be pos­si­ble to uphold the need­ed amount of con­fi­dence in the sys­tem. The amount in cir­cu­la­tion may be lim­it­ed by renew­ing loans with a low­er amount when ear­li­er loans expire. Then the bor­row­er will have to accept a reduc­tion of the amount in his/hers account. To avoid run­away infla­tion in VP’s, one should prob­a­bly start the process by issu­ing a restrict­ed amount (see below), and then let­ting the aggre­gate amount grow (or in between pos­si­bly shrink) based on the observed impact. Note that the exis­tence of VP’s only as elec­tron­ic enti­ties on a com­put­er (no phys­i­cal “cur­ren­cy”), com­bined with the fact that the ini­tial issued loan has not in any way been “earned” by the account hold­er, allows the scheme to freely reg­u­late the amount of VP’s in cir­cu­la­tion upwards or even down­wards, by adjust­ing all accounts with the same amount. This is a new and potent macro­eco­nom­ic con­trol instru­ment that is not avail­able in a reg­u­lar mon­e­tary sys­tem.

Why is mem­ber­ship nec­es­sary?

As already men­tioned, the BLO should be organ­ised as an asso­ci­a­tion or “exchange club”, requir­ing mem­ber­ship. Then the VP’s are not a state-con­trolled medi­um of exchange like euros, but a device only for club mem­bers to exchange goods and labour between them. Hope­ful­ly this will make it dif­fi­cult for the state to ban such a sys­tem, like the Aus­tri­an state did in 1933 against the suc­ces­ful local cur­ren­cy in the town of Wör­gl. Organ­is­ing the scheme as an asso­ci­a­tion with trans­ac­tions only being avail­able to mem­bers, and no mon­ey-like paper VP’s in cir­cu­la­tion, may pre­vent such an outcome.The state may also try the milder coun­ter­mea­sure of levy­ing income tax in euros on such activ­i­ties, por­tray­ing them as “tax eva­sive” and con­sti­tut­ing “a black econ­o­my”. Such attempts must then be fought against polit­i­cal­ly and legal­ly, in par­al­lel with the ongo­ing oth­er pop­u­lar anti-cri­sis resis­tance activ­i­ties. On may expect that such a scheme will be opposed not only by the state; it will prob­a­bly also be derid­ed by the eco­nom­ic estab­lish­ment, includ­ing most finan­cial pages pun­dits. But crit­i­cism in itself is not a fun­da­men­tal obsta­cle. The big­ger dan­ger is whether the scheme may sim­ply be banned, or quashed via euro tax­a­tion.

There is a fur­ther good argu­ment for mem­ber­ship require­ment: One should avoid giv­ing the well-to-do a free lunch in the form of an auto­mat­ic BLO loan, on top of the ample buy­ing pow­er they pos­sess in euros. They should as a rule only be allowed to open an account, but not have access to an auto­mat­i­cal­ly giv­en and renewed VP loan. The BLO should be tar­get­ed towards the less well-off in soci­ety. This may be achieved by hav­ing two grades of mem­ber­ship. Lev­el 1 is open to all (includ­ing firms): you get an account but no ini­tial loan. Lev­el 2 (call it “core” mem­ber­ship) addi­tion­al­ly qual­i­fies for the loan. Core mem­ber­ship should only be giv­en to peo­ple already belong­ing to one or more of the organ­i­sa­tions behind the BLO (unions and sim­i­lar pop­u­lar organ­i­sa­tions, for instance farm­ers’), to pen­sion­ers and to the unem­ployed. And it should be auto­mat­i­cal­ly giv­en, to give the scheme a fly­ing start.

It is prob­a­bly wise to start the process care­ful­ly by only giv­ing auto­mat­ic loans to core mem­bers, and lat­er relax the rules in a con­trolled man­ner, based on how things devel­op. Account hold­ers that default on their loans above some defined lev­el of trans­gres­sion may be exclud­ed as mem­bers of the sys­tem, and their accounts dis­con­tin­ued.

Cred­it above the auto­mat­ic amount?

In an ini­tial peri­od, the sys­tem should be sim­ple and only have the pur­pose of enabling trans­ac­tions between agents that lack a medi­um of exchange (note that this is the main prob­lem, not the lack of mon­ey as a store of val­ue). If the scheme exhibits strong growth and widen­ing accep­tance, the pos­si­bil­i­ty of extend­ing reg­u­lar and large VP loans to appli­cants could be con­sid­ered. But this would demand a dra­mat­ic increase in the staff and organ­i­sa­tion com­plex­i­ty of the BLO, because loan appli­cants have to be vet­ted and col­lat­er­al has to be post­ed. This would prob­a­bly also make it eas­i­er for the state or the cen­tral EU appa­ra­tus to achieve a ban against the sys­tem.

Also pos­si­bly a prof­itable busi­ness pro­pos­al

Assume the exis­tence in one or more euro­zone coun­tries of a mobile phone com­pa­ny led by peo­ple with a cer­tain amount of cre­ativ­i­ty and open-mind­ed­ness. They could decide to be the cen­ter of a BLO-type project. They could start an exchange club and offer a bun­dle with a phone, a sub­scrip­tion, and BLO mem­ber­ship. This would have the largest impact if it was done in coop­er­a­tion with one or more nation­al pop­u­lar organ­i­sa­tions, as men­tioned above. Real­is­ti­cal­ly, such an ini­tia­tive would attract a lot of new sub­scribers and gen­er­ate much traf­fic for the com­pa­ny. Addi­tion­al­ly, the com­pa­ny would ben­e­fit from exten­sive media cov­er­age and be seen by a large share of the pop­u­la­tion as social­ly respon­si­ble and dif­fer­ent from the usu­al run-of-the-mill cor­po­ra­tion.

Polit­i­cal resis­tance from with­in?

Resis­tance from the state and main­stream media pun­dits have already been men­tioned. Anoth­er and per­haps more sur­pris­ing source of resis­tance against this scheme may be the lead­er­ship in some of the mass organ­i­sa­tions whose mem­bers would ben­e­fit from it. Many such lead­ers are anchored in a marxist/communist/left social­ist tra­di­tion. The pro­pos­al may eas­i­ly be seen by some of these as a “pet­ty bour­geouis” inven­tion of the “fringe” or “alter­na­tive” type, only “giv­ing the mass­es illu­sions” and “lead­ing them astray in the strug­gle against cap­i­tal­ism and for social­ism”.

3. A (par­al­lel) gov­ern­ment mon­e­tary sys­tem

The above scheme also has the advan­tage of increas­ing the polit­i­cal pres­sure on the estab­lish­ment: If they con­sid­er it eco­nom­i­cal­ly harm­ful they can avoid it by revert­ing to a reg­u­lar nation­al cur­ren­cy com­bined with nego­ti­at­ing for par­tial euro debt for­give­ness, as already argued by many voic­es. This would put the debtor nations on a much more pow­er­ful foot­ing ver­sus the cred­i­tors, and would be the best solu­tion. But it seems to be polit­i­cal­ly total­ly out of the ques­tion for those in pow­er.

An inter­me­di­ate solu­tion

A gov­ern­ment could how­ev­er, imple­ment an a less dras­tic mea­sure: use a vari­ant of the VP sys­tem described above, as a par­al­lel “emer­gency cur­ren­cy” (“EC”). As already men­tioned, a gov­ern­ment-issued EC has intrin­sic val­ue as opposed to the VP, since it may be used for tax pay­ments. An EC will there­fore eas­i­ly be accept­ed as a means of pay­ment by any agent ? indi­vid­ual or firm ? that is oblig­ed to pay tax­es.

An advan­tage of imple­ment­ing this sys­tem elec­tron­i­cal­ly using the mobile phone net­work, is that it may be up and run­ning very quick­ly after a gov­ern­ment have decid­ed to do it, so that its pos­i­tive effects may have been demon­strat­ed before the EU sys­tem could mar­shal forces to stop it. It will then be very dif­fi­cult to kill, due to gained pop­u­lar sup­port.

A fur­ther advan­tage of an elec­tron­ic EC is that tax avoid­ance is impos­si­ble, since any trans­ac­tion occurs via accounts in licensed banks, and is logged there.

This scheme could also be use­ful for non-EU-coun­tries, or such nation­al regions that have author­i­ty to col­lect region-based tax­es, like the near-bank­rupt U.S. state of Cal­i­for­nia. There EC’s could be imple­ment­ed by the state gov­ern­ment, with imme­di­ate pos­i­tive results.

3. Con­clu­sion: bet­ter than the bleak alter­na­tives

Enabling unem­ployed or under­em­ployed peo­ple to work for each oth­er and (increas­ing­ly) to exchange goods and ser­vices with the rest of soci­ety, will ? with imme­di­ate effects ? ame­lio­rate the dra­mat­ic and per­sis­tent decrease in liv­ing stan­dards for most peo­ple, which is the bleak and only future (last­ing many years) that the pow­ers that be and most pun­dits are able to come up with. By the pro­posed scheme it should be pos­si­ble to acti­vate a large under­used poten­tial that the hard-hit euro­zone coun­tries have, unem­ployed or under­em­ployed peo­ple, and to give many a bet­ter life. It will pri­mar­i­ly stim­u­late domes­tic pro­duc­tion, since VP/EC’s may not be used to pay for imports. It will also give euro-indebt­ed coun­tries a dra­mat­i­cal­ly bet­ter posi­tion in their bar­gain­ing for par­tial debt for­give­ness.

And if gov­ern­ments refuse to do this regard­less of how bad the alter­na­tives are, the option is there for non-gov­ern­ment enti­ties as described, for the first time in his­to­ry, thanks to tech­no­log­i­cal advances.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.

Video overview

Debunking Economics II

Disclaimer

This site does not give personal financial advice. The focus of this blog is economic analysis, and how you interpret this with respect to your own financial decisions is entirely up to you.

Steve Keen, Debtwatch, and any employees or associates will not be held liable for any losses resulting from decisions taken by any individual or entity as a consequence of reading materials on this blog.

Membership or sponsorship of this blog does not constitute purchasing any product service apart from those listed in the membership and sponsorship conditions.